The AI Boom Is Running Out Of Easy Money

What's driving the markets this week? What's on investors' minds as they look ahead? Find out on the Markets Podcast from Goldman Sachs. A breakdown of market moves and macro signals in 10 minutes or less. The Markets Podcast from Goldman Sachs. Listen now. This episode is brought to you by Indeed. You're ready to level up your business, but the pressure to find the right person to make that happen is intense. Indeed Sponsored Jobs can help carry the load. It boosts your job post to help it reach quality talent fast. Cut through the chaos with Indeed Sponsored Jobs. Get a $75 sponsored job credit at indeed.com slash podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed Sponsored Jobs. This is Blue from the UPS Store with a very special holiday announcement for small business owners. We're open! Let's be real. Your deadlines don't take holidays. So while the other guys are checking out, the UPS Store is here to pack, ship, print, shred, notarize, and check more things off your list all year long. With over 5,500 locations, there's a Blue near you at the UPS Store. Shredding services are provided by Iron Mountain as is. Visit theupsstore.com slash shredding for full details. Most locations are independently owned. Product, services, prices, and hours of operation may vary. See store for details. Welcome to Simply Put. I'm Ed Elson. This week, when the music stops. For the past three years, we have asked the same question. Is generative AI a viable business? That might sound dumb, as generative AI revenues have exploded. However, so too have generative AI losses. Take it from Elon Musk, who just admitted that he's not a generative AI business. The Grokbot business model isn't working. We're still early, I know. But not that early. It's been four years since ChatGPT launched, and not one pure-play LLM maker has demonstrated an ability to make more than it spends. That doesn't mean AI companies are doomed. It just means they're unproven. And with trillions of dollars on the line, proof matters. That's why Anthropix recently released IPO filing was so important. It was our first proper look at whether the LLM-making business actually works. On first look, the answer was yes. Revenue grew roughly 1,200% to $33 billion through the first nine months of the year. And more importantly, operating losses sank by about 75%. That is a great signal that the most valuable AI startup in the world is about to become profitable. But then I read the fine print. And while it's true that Anthropix narrowed its losses, that's not going to last. Why? Because they're about to spend more money than you could ever comprehend. This is what investors are missing. Not only will Anthropix not be profitable next year, it will likely be more unprofitable than ever before. When capital is cheap and seemingly infinite, that's no problem. However, that's all about to change as well. First, an explainer on Anthropix's spending. Despite its rosy income statement, the full story is buried in the liquidity and capital resources section of the S-1. There, we learn about its purchase commitments, i.e. the amount of money that Anthropix has promised to spend on compute in the future. The original filing left the total blank. The amended version, released last week though, filled it in. $895 billion. Nearly all of it on compute. In other words, Anthropix's costs are about to explode. Over how many years? Good question. Roughly $70 billion of those commitments must be paid in the next 12 months. And another $450 billion is due by the end of 2030. Do the math and you are looking conservatively at compute bills of more than $100 billion per year starting next year. Compare that to the $19 billion they've spent this year and you realize this business is about to become unrecognizable and not in a good way. Can they back out of these contracts? Only some of them. Some $437 billion of that spending is non-cancellable, with Broadcom describing its contract terms as quote, absolute and unconditional. To put $437 billion in context, that is more than the entire company was worth less than eight months ago. This isn't to say the company is bad. It simply means that the notion of imminent profitability implied by the income statement is not only a red herring, but also a gross misrepresentation. of what the business is about to look like. It won't just be unprofitable, it will be deeply unprofitable. And by the way, Anthropic admits this. Per the filing, quote, our increasing efforts to build out our compute and infrastructure require substantial capital expenditures that are changing the cash flow of our business. Translation, massive losses are on the way. So, if Anthropic is about to lose gobs of cash, who will provide the money? Answer, you. Although the company has a staggering war chest of more than $130 billion, its costs will be more staggering. That is why it's going public. Anthropic needs to raise money, because if it doesn't, it won't be able to pay its bills. The company going public for financing reasons is not unique. What is unique, however, is how much Anthropic is raising. Roughly $100 billion. That is already enormous, but it's especially enormous when you realize how much money everyone else is raising too. Over the past 10 months, the hyperscalers, Microsoft, Meta, Amazon, Google, and Oracle, have raised more than $300 billion in debt and equity. The reason they're doing this is to build data centers. And while that number might sound crazy, it is, just know that next year's will be crazier. Meta has planned another $60 billion equity offering in 2027. And Morgan Stanley estimates that hyperscaler debt, issuance, could exceed $1 trillion by 2028. Put another way, the true test of capital won't be 2026, it'll be 2027. The more important question, however, is why cash cows like Amazon and Google need more money. Aren't they already ridiculously profitable? Increasingly, the answer is no. Due to the $800 billion they spent on AI this year, every hyperscaler aside from Microsoft is now cash flow negative. This is remarkable, considering these companies are known as the most profitable businesses in history. That's where you come in. Over the past several years, very few companies have asked you for money. IPO issuance has been historically low, and existing companies have been happy to finance operations on their own. But that is all about to change. All of a sudden, many of the world's most valuable companies need hundreds of billions of your dollars all at once. This is very unlike big tech, whose profits have historically been so strong that the very notion of asking for anything would have been seen as an admission of defeat. The AI era, however, is very different. We are all in this together now. Financial independence is a relic of the past. The trouble with needing money is it makes you extremely vulnerable when people are no longer willing to be generous. It's like being a kid. Your fate is in someone else's hands. The good news for you is that you don't have to worry about money. The good news for kids is that most parents are willing to help them no matter what. Companies, however, do not have that luxury. Investors will let them die. A couple weeks ago, we got our first taste of what that might look like. After big tech reported solid earnings, investors got the AI jitters, largely in reaction to how much money these companies continue to spend. Google plummeted more than 10% overnight, erasing roughly $500 billion in market value. Intel fell more than 25%. Its worst week ever. It was a bloodbath. But that's what happens when investors get anxious. They become harder to please and easier to frighten. On Wall Street, this emotional state is known as the music. It became especially famous in July 2007 when Citigroup CEO Chuck Prince told investors that when the music is playing, you've got to, quote, get up and dance. In other words, don't shy away from an exuberant market. Four months later, however, the housing bubble popped, Citigroup had to write down billions of dollars in losses, and Chuck Prince was removed as CEO. He was right about what to do when the music was playing, but he was wrong about when it would stop. The obvious question for investors is how the music sounds right now. As always, it is hard to tell. One thing that's for certain, though, is that it is playing. Meta's recent $25 billion stock sale was five times oversubscribed. Amazon's $25 billion stock sale drew $62 billion in orders, and Microsoft just pulled off one of the most sought-after debt offerings on record. That is not the sound of silence. At the same time, some of the music is starting to go out of tune. In the past month, Corweave's bond yields have exploded to 15%, and many neoclouds have seen their valuations get cut in half. Meanwhile, the Financial Times reported that Anthropic will not receive the investment-grade credit rating that it wanted. Hello, junk status. And OpenAI just slashed its funding target by $10 billion. In both cases, exuberance was lower than previously anticipated. These aren't signs that the party is over, but they do suggest that the lights are coming on. Our greatest musical signal, however, will be the Anthropic IPO, set to take place within the next two weeks. The expectation is that demand will be through the roof, which means the stock should rocket upward as soon as it lists. That is exciting for Anthropic, but also terrifying, as anything less will be seen as evidence that something has gone wrong. The trouble with capital markets is that they're temperamental and moody. They will fall for you just as quickly as they will turn you away. That is why you should never depend on them. Yes, they have been very generous over the past few years, but that's because the MDMA has been hitting. And the music has been blaring. Everyone is nice in that environment. I get the sense, though, that the drugs are beginning to wear off and the sun is starting to rise. As for the music, I hear it, but it's getting fainter. This edition of Simply Put was produced by Claire Miller and Alison Weiss, edited by Natalia Cabrera and engineered by Benjamin Spencer. Our research associate is Dan Chalon. The design editor is Olivia Rooney-Hall. Special thanks to Vivian Jang, Audrey Hettelman, and Rohit Boer. Thanks for listening to Simply Put by Ed Elson. You can find this piece and more on Substack. Just go to edwardelson.substack.com. We're open! Let's be real, your deadlines don't take holidays. The Viore Core Short moves with you. With everyday versatility and classic athletic fit. It's the one short for everything your day brings. Invest in your happiness and get 20% off your first purchase at viore.com slash 420. That's viore.com slash k-o-r-e-2-0. Exclusions apply. Visit the website for full terms and conditions. Now at Kroger, your points add up to more ways to save every trip. Use them your way to take dollars off groceries at checkout or save at the pump. 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